Good morning, my name is Sarah. I will be the conference operator today. At this time, I would to welcome everyone to Limited Brands first quarter 2010 earnings conference call. (Operator Instructions) I would now like to turn the call over to our moderator, Miss Amie Preston, Vice President of Investor Relations. You may begin your conference.

Amie Preston

Thanks, Sarah. Good morning, everyone, and welcome to the Limited Brands first quarter earnings conference call for the period ending Saturday, May 1, 2010. As a matter of formality, I need to remind you that any forward-looking statements we may make today are subject to our safe harbor statements found in our SEC filings.

Our first quarter earnings release and related financial information, including any non-GAAP or adjusted financial reconciliation tables, are available on our website, limitedbrands.com. This call is being taped and can be replayed by dialing 1-866-news-ltd. You can also listen to an audio replay from our website.

Martyn Redgrave, EVP and Chief Administrative Officer; Stuart Burgdoerfer, EVP and CFO; Sharen Turney, CEO Victoria's Secret; and Diane Neil, CEO Bath & Body Works, are all joining us today. After our prepared comments, we will be available to take your questions for as long as time permits. So that we can speak with as many callers as possible, please limit yourself to one question. Thanks, and now I will turn the call over to Martyn Redgrave.

Martyn Redgrave

Thanks, Amie, and good morning everyone. I'd like to start by saying that we're very pleased with our performance in the first quarter. Our comps increased 10% and our operating income nearly tripled. Our adjusted earnings per share of $0.25 significantly exceeded our initial expectations of $0.05 to $0.10 and last year's result of $0.01 per share. This strong performance was the result of our intense focus on execution, staying close to our customers, and increasing speed and agility.

Overall, we continue to believe that the environment remains uncertain and challenging. Accordingly, as Stuart will explain in more detail in a minute, we have and will continue to manage inventory expenses and capital very conservatively. We will also continue to drive the business with on overriding focus on disciplined execution of retail fundamentals. Improving our ability to react with speed and agility to maximize our sales and profit opportunities yielded results in the first quarter and continues to be a critical priority for all of us. Our entire organization is aligned and focused on these key priorities.

While we made considerable progress, we see many more opportunities to improve in many areas. Our number one priority continues to be improving the results of our core U.S. businesses. As you see, our operating income rate increased significantly in the first quarter; and this gives us confidence that we are on track towards our 15% operating income rate goal.

Before I turn it over to Stuart, I’d like to provide you with an update on our international businesses beginning with the La Senza business. We're continuing to take actions to improve results at La Senza. Last quarter, we closed the underperforming La Senza Girl business.

In the first quarter, we announced plans to relocate our creative and merchant leadership teams for the La Senza brand to Columbus, Ohio. We believe that this move will better connect the brand to enterprise resources and will support the team in building on the advances they have made in product, store experience, and brand positioning. We are beginning to see improvement in the performance of the business driven by the previously mentioned advances in product, store experience, and brand positioning. We are also testing some changes in store design layout that are yielding very encouraging early results.

In the first quarter, La Senza comps were up 3%. The merchandise margin rate increased significantly, driven by a favorable foreign currency impact compared to last year as well as the improved assortment. As we have previously mentioned, La Senza purchases merchandise in U.S. dollars.

We also incurred severance costs of approximately $7 million related to the relocation of the business, which resulted in significant buying and occupancy and SG&A expense de-leverage. As a result of these costs, the La Senza operating loss increased in the quarter. In addition, we anticipate incurring additional costs in the second quarter that will approximate $0.01 per share.

Turning to our other businesses in Canada, we ended the quarter with 36 Bath & Body Works stores and 4 Pink stores. We continue to be very pleased with the performance of these stores. In August and September we will open four Canadian Victoria's Secret stores in the West Edmonton Mall in the Toronto area. In addition, we plan to open four more Pink stores and about 25 more Bath & Body Works stores across Canada this year.

In conjunction with the relocation of the La Senza business, we also announced the establishment of Limited Brands Canada, which is responsible for the operations of all of our brands in Canada and will be led by Joanne Nemeroff. Joanne will also continue in her role as the president of La Senza, the brand.

We also announced a new franchise agreement in the first quarter. We will be partnering with M. H. Alshaya Company to open a handful of BBW stores in the Middle East later this year. We are building on our existing base of profitable sales outside the United States with our expansion plans in Canada and the early success we are seeing in other initiatives. We believe that we are just beginning to exploit the full potential of our brands internationally.

In closing, we were very pleased with the progress and performance of the business over the last couple of quarters; but we continue to see opportunity to improve, and we are focused on getting even better. Thanks, and now I will turn it over to Stuart.

Stuart Burgdoerfer

Thanks, Martyn, and good morning everyone. So turning to our first quarter performance, our adjusted earnings per share increased to $0.25 a share from a $0.01 last year. Our 2010 reported result was $0.34 per share. As detailed in our press release, this year's reported results included pre-tax gains of $48.7 million or $0.09 per share related to a cash distribution from Express. All results discussed on this call exclude this significant item.

To take you through the first quarter results in more detail, net sales were $1.932 billion versus $1.725 billion last year and comps increased 10%. The gross margin rate increased 420 basis points to 35.9%, driven roughly equally by an increase in the merchandise margin rate and buying and occupancy expense leverage.

SG&A expense increased by $26 million or 5%, and the SG&A rate leveraged by 160 basis points. The expense increase was driven by an increase in store selling costs and incentive compensation.

Total operating income increased $119.8 million or 580 basis points as a percent of sales to $185 million or 9.6% of sales. By segment, the Victoria's Secret segment increased by $80 million, or 550 basis points as a percent of sales, to $167.3 million, or 13.2% of sales. Bath & Body Works increased by $33.8 million, or 780 basis points as a percent of sales, to $37.7 million, or 8.8% of sales.

In the other segments, operating loss declined by $5.9 million to $20 million. Total nonoperating expenses decreased by $15 million, driven by an increase in equity income from Express and Limited stores during the quarter. Our first quarter interest expense included $10 million in one-time incremental expense related to the termination of an interest rate hedge in association with the payoff of the remaining $200 million under our term loan.

Turning to the balance sheet, retail inventories ended the quarter down 16% per foot at cost, partially driven by the anniversary of the pull-forward of Victoria's Secret inventory in connection in advance of their systems implementation last year.

Turning to our earnings outlook for the remainder of the year, two events are impacting our results versus our previous guidance. First, we issued $400 million of 7% ten-year bonds in the first quarter. In May, we used the proceeds from this offering to retire $133.6 million of our 6 1/8 2012 maturities and $266.4 million of our 5 3/4 2014 maturities.

We paid a premium to tender these bonds, which will result in a second quarter charge of about $25 million or $0.04 to $0.05 per share. This charge will be treated as a significant item, which will be adjusted out of our reported results and is, therefore, not included in our earnings guidance.

Incremental interest expense of roughly $2 million per quarter is also included in our guidance. Second, Express completed an initial public offering in May in which we sold 1.28 million shares. The second quarter pre-tax gain related to the IPO of approximately $50 million or $0.10 per share will also be treated as a significant item and adjusted out of our results and is, therefore, not included in our guidance.

We continue to own 16 million shares or about 18% of Express. Because our ownership percentage has fallen below 20%, we are evaluating whether to continue to account for our ownership in Express under the equity method or move to the available for sale accounting method. At this point, our guidance reflects continuation of the equity method of accounting.

Turning to the second quarter, we are forecasting earnings per share between $0.27 and $0.32. This forecast reflects a comp increase of 2% to 4%. We remain comfortable with our May comp guidance of flat to up-low single digits. We are continuing to manage the business conservatively and with discipline. We expect that inventory levels will be down in the low to mid single-digit range throughout the second quarter, and we also intend to be much less promotional. For example, Victoria's Secret stores' Memorial Day sale will be shorter and smaller this year. Victoria's Secret Direct's semiannual sale will be five days shorter. And Bath & Body Works semiannual sale will be ten days shorter.

We anticipate that the gross margin rate will be up significantly to last year, driven by an improvement in the merchandise margin rate. We expect that the SG&A rate will improve slightly. We expect total nonoperating expense of approximately $50 million consisting principally of interest expense. Before any discrete items, our tax rate will be approximately 38%; and weighted average shares will approximate $330 million in the second quarter.

For the full year, we are projecting a low single-digit comp increase. Full year gross margins will be up to last year. We expect the full year SG&A expense rate to improve versus last year. We expect full year interest expense of about $215 million, down almost $25 million from last year as a result of our reduction in debt in 2009 and the repayment of our term loan this year. We are projecting total other income, including interest income, of roughly $40 million.

Assuming all of these inputs, we expect earnings per share for the full year 2010 to be between $1.60 and $1.80 per share. Our view of the balance of the year has not changed from our beginning of the year view. As we look at the calendarization of earnings in the fall season, we want to remind you that our third quarter adjusted EPS results over the last 3 years has ranged from a loss of a penny to earnings of $0.02.

As we previously noted, we incurred incremental expenses related to activities occurring in advance of the Christmas holiday and a low sales volume quarter. Additionally, the third quarter has a much lower merchandise margin rate than the first quarter which has a similar sales volume driven by the higher percentage of mass sales.

Accordingly, we anticipate a result in line with to a few cents above last year's $0.02 per share result. We are projecting 2010 CapEx of $250 million to $300 million with roughly 70% of this spending on real estate and stores. We plan to open roughly 45 stores this year, mostly in Canada, and close roughly 70 stores. We will end the year with total square footage roughly flat to last year, and the details of our 2010 store plans are included in the supplemental financial information package on our website. Our remaining CapEx spending relates to technology, distribution centers, and home office projects.

Turning to liquidity, we expect free cash flow in 2010 of between $500 million and $600 million. Our free cash flow and cash position, along with the additional availability under our revolving credit facility, result in very strong liquidity, which is more than sufficient to fund our working capital, capital expenditures, dividends, and any other foreseeable needs.

In the first quarter, in continuation of our ongoing commitment to return value to shareholders, we paid a special dividend of $1 per share or $325 million; and we authorized a $200 million share repurchase program. Thanks. Now I will turn the discussion over the Sharen.

Sharen Turney

Thank you, Stuart, and good morning everyone. We are pleased with the progress made in Victoria's Secret. Entering the first quarter, we purposefully set out to balance optimism about our business with the benefit of managing the business conservatively. I believe our improved performance was largely due to three key things.

First, our mantra continued to be focus, focus, focus on our two key categories, bras and panties, which we delivered with a stronger fashion point of view and more color. Second, we stayed agile. We began the season with an improved inventory position; and we focused on speed, which allowed us to read and react quickly to winning items and make big bigger. And finally, we continued to bring it all together as a brand story well told to our customers across all channels. And just one example, after better coordinating the brand story and investing in improved field execution, we achieved record conversion rates in the first quarter.

Let's move to review by channel. In Victoria's Secret stores, our comps for the quarter were up 12% and total sales increased 14% to $828 million. Our results were driven by improvements in all three business units, Lingerie, Pink, and Beauty. In Lingerie, customers responded to the constant newness and fashion we're providing through the Miraculous bra, the improved Body by Victoria collection, cotton bras, and the Naked collection.

Pink delivered very strong performance driven by our expanded bra and apparel offerings; and our Beauty business exceeded our expectation with solid growth across key categories, driven by adding freshness in fragrance and body care through several new product introductions.

The first quarter merchandise margin rate was up to last year as the strength of our assortments, and improved inventory management contributed to increased full price selling. Buying and occupancy expense leveraged significantly on the positive 12% comp. The SG&A expense rate also leveraged, a result of our continued focus on disciplined expense management – all of which led to operating income dollars and rate, both being up significantly to last year at Victoria's Secret stores. In fact, Victoria's Secret stores' operating income dollars more than doubled from last year's results.

Now let's review performance at Direct. First quarter sales increased 10% to $350.2 million driven by broad-based strengths across the assortment including intimate, knit clothing, and swim. The merchandise margin rate was up significantly to last year on the strength of our assortment which allowed us to reduce promotional activity. We achieved significant expense leverage, and operating income dollars nearly doubled, and the rate was up significantly to last year at Victoria's Secret Direct.

Looking ahead to the second quarter, we will continue the discipline that served us well in Q1. Our focus will continue to be on our core categories, bras and panties, and on delivering strong, must-have assortments in both. And we will continue to emphasize a culture of speed and agility. That includes managing inventory with discipline and testing fads, but thoroughly so we can read and react quickly to winners with little lag time.

Again, we are pleased with our progress so far; but we know there is more to do. In the quarter and the year ahead, I see us executing the fundamentals with even more discipline, simplicity, and speed; and we will continue to work to get even closer to our customer to enable us to drive ongoing improvements in the customer experience and in Victoria's Secret's financial performance. Thank you. Now I will turn it over to Diane.

Diane Neil

Thank you, Sharen, and good morning. At Bath & Body Works, we are very pleased with the results of our first quarter. We were able to deliver sales growth and significant operating income growth by maintaining focus on our three key categories. Our Signature Collection product line, the antibacterial business, and our home fragrance assortment, all which continued delivering improved results versus last year.

Signature Collection sales growth was driven by the launches of new fragrances, [PS I Love You 2, Sweet Pea Forever, Moonlight Magic, Orange Sapphire, and our new Summer Vanillas collections. The antibacterial business, which was restaged in January, continued its strong growth trajectory driven by growth in both of our soap and hand sanitizer categories. Our home fragrance sales were up to last year and continue to be driven by strong candle performance, as well as the introduction of new forms in our diffuser category.

Transactions were up versus last year driven by growth in traffic while maintaining our high conversion rate. Customers also spent more per transaction versus last year.

So with that backdrop, let me take you through the financial results for the quarter. Bath & Body Works first quarter comps were up 7%. Total sales for the quarter were $430 million, up 7% or $28 million versus last year.

For the quarter, our operating income was $37.7 million, up $33.8 million for the first quarter of last year. Operating income as a percentage of sales was 8.8% in the quarter and up significantly to last year. Operating income was driven by the positive sales comps, improvements in merchandise margin rate, and expense decreases. Both buying and occupancy and SG&A leveraged in the first quarter.

The active management of inventory allowed us to be less promotional versus last year and finish the quarter with inventory levels down. This is our twelfth consecutive quarter our inventories down year-over-year while our in-stock positions continue to improve.

The Bath & Body Works direct channel delivered strong sales growth, and we continue to view the direct channel as both a revenue generator and marketing vehicle for our brand and collection of sub-brands.

With that in mind, I'd like to give you a preview of what our customers can expect in the second quarter. We will continue to introduce newness and innovation in both form and fragrance. Our Signature Collection body lotion, which is our largest form, launched in an all-new, improved formula. We will also launch Deep Aqua, which is a new Signature Collection fragrance; and we'll launch an all-new Signature Collection men's line in four fragrances.

For the antibacterial business, we will also launch new seasonal fragrances in soaps and sanitizers. As Stuart mentioned, our June semiannual sale theme will begin in mid-June and will be ten days shorter than our sale of last year. We estimate that this will negatively impact the second quarter comps by three to five points. The sale has been shortened due to better inventory management in seasonal and core items.

In addition to our focus on product and fragrance launches, we will continue to manage expenses and inventory conservatively. We're cautiously optimistic about our second quarter but are excited about the assortment and the visual appeal of our shops. We will continue to drive results by offering newness, responding to business trends, and testing new products and promotional strategies to drive traffic and gain share. With that, I will turn the discussion back over to Amie.

Amie Preston

Thanks, Diane. That concludes our prepared comments. Before we take your questions, just a reminder to please limit yourself to one question so that we can get to as many people as possible. Thanks, and now I will turn the call back over to Sarah to take your questions.

Thank you. Good morning. Just wondering how we should think about SG&A dollars as we move through the year. Were there any incentive comp accruals or any other items that we should take into account as we model our 2Q, 3Q, and 4Q?

Amie Preston

Thanks, Lorraine; we will go to Stuart for that question.

Stuart Burgdoerfer

What I would say, Lorraine, is that on a full-year basis as we've indicated to you, we expect to have light leverage, modest leverage on a whole-year basis. With respect to incentive comp accruals, there was some negative impact in the first quarter based on the strength of our result versus what we were lapping from a year ago. And in the back half of the year, with respect to IC, as we mentioned on the yearend call, we did have significant payouts a year ago based on the strength of the fall performance last year. Again, on an overall basis, expecting leverage in SG&A, slight leverage in SG&A, full year basis.

Amie Preston

Next question.

Operator

Your next question comes from Brian Tunick – JP Morgan.

Brian Tunick – JP Morgan

Thanks. Good morning. I guess my question is, not to take the first quarter OP margin at BBW and run that through, but it looks like you could get to that 16-17% level this year at BBW. I was just wondering, I know your longer 15% OP margin target for the overall company, but is there anything that prevents BBW from getting beyond the 17% margin goal you've stated?

Amie Preston

Thanks, Brian, we will go to Stuart.

Stuart Burgdoerfer

Brian, as we've talked about previously, what we're looking for and what we think is appropriate for both of the big segments, that is Victoria's and Bath and Body, is operating margin at 17% to 18% range for the company to deliver 15%. Bath and Body has the potential to be in that range this year. But the balance point is always for all of the businesses, Bath and Body and Victoria's, reinvesting in the business to make sure that we deliver a good, healthy, long-term result.

Amie Preston

Thanks, next question.

Operator

Your next question comes from Todd Slater – Lazard Capital Markets.

Todd Slater – Lazard Capital Markets

Thank you. My question is for Sharen and Diane. You both executed very well, and you both delivered in a big way. I know your mantra is to do even better. What are the specific areas in which you think you can do even better? And Sharen, what are the benefits you are seeing, if any, from SAP from that implementation? And Stuart, have you baked any of that SAP benefit into your guidance? Thanks.

Amie Preston

Thanks, Todd. We will start with Diane about where you think you can continue to get better.

Diane Neil

Well, I think if we look at our big three categories, our Signature, antibacterial soap business, and home fragrance, we still have, I think, upside and long-term growth for those categories with not only new fragrance introductions, but we have gotten great response to all the new formula upgrades that we have had. And we've got more formula upgrades coming in the fall season, as well as a whole new fashion assortment in some of our home fragrance areas. So we feel actually that three categories themselves offer continue upside growth.

Amie Preston

Thanks, Diane. Sharen?

Sharen Turney

Todd, I will take the technology question first and then I will get into the opportunities. We are very pleased with the implementation that we did last year, and it went very smoothly. We installed the new platform with really minimal distraction to the business, which was our goal. We are seeing the benefits. I think those benefits will grow over time. But also, I just want to remind all of us that the systems are an enabler; but they don't determine performance. And the merchandise decisions and retail execution do. We believe our focus and discipline in those areas really are yielding the results that we need.

When I think about the opportunity at Victoria's Secret is that we have really increased our speed to market in the spring season, really allowing us to keep open to buy and flexibility – reading and reacting and making big bigger. I think that we're just at the beginning of our speed initiative, which I think will only enhance our performance, not only from a sales perspective, but also from a profit perspective.

The other thing in terms of how we're delivering fashion. Actually this year we will be adding a whole new fashion delivery in the month of June. That is very key. The last point I would make is that as we think about our key bra launches, is that this year we have had a better balance between our bra launches and getting true incrementality of the bra launches and doing more than one thing at a time to really capture a broader customer. We're very pleased with that, but still have much more to do around that key initiative.

Amie Preston

That's great. Thanks, Sharen. Next question.

Operator

Your next question comes from Janet Kloppenburg – JJK research.

Janet Kloppenburg – JJK Research

Congratulations on a great quarter. I was wondering if Sharen and Diane would address any sourcing pressures that they're looking at in the back half of 2010 and into 2011, and if that could result in some higher pricing going forward. Thanks.

Sharen Turney

I think that you may be referring to anything from a cotton, you keep reading about cotton prices going up, we were very aggressive in really identifying that with our sourcing partners and it really took a position. So I think in the back half you will not see any increases in our prices. What that means for 2011 is yet to be seen. But right now we do not see any significant increase in pricing in our sourcing, and I think that we're very well positioned and that's really through our great partnerships that we have.

Janet Kloppenburg – JJK Research

But Sharen, will it allow you to maintain the value equation you now have in place and perhaps the customer is looking for more value because your promotional activity is declining?

Sharen Turney

You know, it will allow us to keep our same value, absolutely. Our promotional activity is absolutely, we have not had any promotional activity in terms of sales or anything in the first quarter. I think that what we have every day is a great value proposition in terms of the quality of our product, the fact that we instituted a good, better, best pricing strategy as we entered into 2010. And that's working very well for us, and we see nothing that's going to get in our way to be able to continue to deliver on that.

Amie Preston

Thanks, Sharen. Diane?

Diane Neil

At Bath & Body Works we don't anticipate any cost increases throughout the remainder of 2010.

Amie Preston

Next question.

Operator

Your next question comes fromMichelle Tan – Goldman Sachs.

Michelle Tan – Goldman Sachs

Sharen, I was wondering if you could talk a little bit about the Naked launch, you know, what you would do differently in the future and then any color on any of the upcoming launches or type of launches that you're thinking about for the back half?

Sharen Turney

The Naked launch exceeded our expectation, and we were very pleased with the Naked launch. The other thing that we were pleased with the Naked launch is that because it's an unlined bra, we not only did well with the Naked launch, at the same time we also saw increment in terms of our push-up category. We were very pleased with the performance. We have a very strong line-up of launches coming forward, not only at the back half of the second quarter, but also as we go in through the fall season.

Amie Preston

Thanks, Sharen. Next question.

Operator

Your next question comes fromJeff Stein – Soleil Securities.

Jeff Stein – Soleil Securities

Question for Stuart. Stuart, it sounds to me like a lot of the improvement that you guys have made in terms of EBIT margin so far has come from better execution. So I am wondering if you could just talk about the flow-through in each of your core businesses and how that has changed. In other words, a dollar of incremental sales flows through at X cents on the dollar 1-2 years ago, now it flows through at Y. What would that relationship be today versus couple of years ago?

Stuart Burgdoerfer

Maybe the way to [inaudible]. It's a good question. When business – and I am going to be plain-spoken and simple about it, simplistic about it, but I think it makes the main point. When our business is not doing well, in some combination from the economy and our own execution and our comps are negative, the flow-through on sales change is going to be pretty significant in terms of how that looks.

A normal flow-through in the business would be in terms of a dollar of increased sales normally we'd see $0.30 to $0.40 of operating income flow-through. What we've had in the fourth quarter, particularly, and this first quarter is we've had extraordinary flow-through. And particularly in this first quarter, we had sales growth obviously, we have very substantial merchandise margin rate improvement; and then we got leverage on the buying and occupancy line and on the expense line as we continue to manage expenses pretty well.

But this flow-through is extraordinary and the product of a lot of good, hard work. Over time, as we lap better results, we will get to that more normal flow-through of 30% to 40%. Again, that's to the operating income line.

Jeff Stein – Soleil Securities

Would you characterize the first quarter flow-through rate as probably a rate that would not be sustainable?

Stuart Burgdoerfer

Absolutely. When I say extraordinary, I mean extraordinary. I, frankly, in my time in this business and in some others, I've never seen flow-throughs quite like this before in a very positive sense. Again, the product of everybody on this call and lots of other people working really hard to drive a good top line, to do all the things we're doing to improve merchandise margins, and also managing expenses in a tough-minded, disciplined way.

Amie Preston

Thanks, Jeff. Next question.

Operator

Your next question comes from Jennifer Black – Black & Associates.

Jennifer Black – Black & Associates

Congratulations. My question is for Sharen. I wondered if you could talk about VSX and Shapewear, and are you making any changes to your catalog circulation? Thank you.

Sharen Turney

We launched the Shapewear category this spring season in a pretty full-blown way in about 60 stores to get a test read. We were very pleased and really have been reacting with speed to be able to actually put that product in even more stores. What that test allowed us to do is really test broad. Now we've focused into the real winners, and we are going to continue to expand that as we go into the fall season. So we're very excited about that.

Our VSX business that right now is comping about 42% in the stores that it was in this year versus last year. We still feel good about this category. I think that as we think about our continued disciplined focus on the bra and panty category through 2010, hopefully we will see even more opportunity in VSX as we go through 2011.

Amie Preston

And catalog circulation

Sharen Turney

Catalog circulation, there is no change. In fact, we're actually going to be publishing a new Pink catalog, exclusive Pink catalog, this back to school time frame, but the catalog circulation is not changing.

Amie Preston

Thanks, Jennifer. Next question.

Operator

Your next question comes fromJohn Morris – BMO Capital Markets.

John Morris – BMO Capital Markets

Good morning. Let me add my congratulations to everyone. Diane and Sharen, as you each look ahead to fall and holiday, where do you see the opportunity in the merchandise assortment to last year? Can you give us a couple of specific highlights of where that opportunity might be? And Martyn, on La Senza, is it possible to bring that brand to the U.S. at some point and, if so, when could that be? Thanks.

Amie Preston

Thanks, John, we will start with Diane.

Diane Neil

I probably can't give you some specifics on what we've got going forward in the fall and holiday season for many reasons, but we have in our big three key categories, we continue to have more newness than last year and continue to learn this spring season. And as Sharen has mentioned, we are also working on the speed model. So the learnings that we have now, we're implementing into the third and fourth quarter for this year.

Sharen Turney

As we think about fall and holiday, number one, we are excited about where we're headed from a product launch compared to last year as we have that in work in progress right as we speak. When I think about Q3, we will have no sale. Last year in September we had a big sale. We're looking at being full price. We're looking at turning faster. We're looking at continuing to focus on the bra and panty category. We're looking to continue the leverage of bringing the brand story to life into the store, so that as we continue to drive traffic, get better execution, also continue to hopefully to see then the record conversion.

We will be entering the third quarter balancing the conservatism with optimism as we're getting very good traction in the business today with the macroeconomics being what they are. We want to keep as much agility as we can so that we can read and react. I think that we're getting paid for those results by being conservative in the first quarter, and we will continue that same thinking and discipline as we go into the third and fourth quarter. But we are very excited about the products.

Amie Preston

Thanks, Sharen. Martyn.

Martyn Redgrave

On La Senza, I think a couple of key messages are really the first things that come to mind to me. As you've seen in my remarks, we're making a lot of changes with our La Senza management team, our La Senza business, our La Senza brand. So the first key message is the changes we're making are indicative of the fact that we're declaring that La Senza is a core brand to us, our worldwide basis. Our first priority is Canada and the positioning of the brand and the assortment in Canada and managing our way through the transitions that we're making with the management team.

Our second priority for La Senza is the repositioning of the international franchise system of La Senza, which you may recall is 400 stores distributed through 40 countries around the world. And the management team is very focused on how to reengage with our international franchisees in a very positive and growth-oriented way. Beyond that, all kinds of things are possible; but we don't have any current plans or timelines attached to other ideas.

Good morning. I will add my congratulations as well. I was wondering, Sharen, if you could update us on your speed initiative. I think you had mentioned a goal of getting 40% to 50% of the key items of Victoria's Secret onto a 6-week reorder or lead time. Where are you in that process? And, ultimately, how fast do you think you can get in terms of the core, everyday product at Victoria's Secret?

Sharen Turney

Right now we are continuing to work to get better. We have reduced our lead time about 50%. Today we do have a robust basics program which we're constantly flowing good. As I mentioned in my opening remarks, within the speed initiative, we made great progress. I don't want to make anything away from the progress, but we're at the beginning of the beginning. I think that there's a lot more for us to do in terms of how, the basic piece is easy because that's just a constant flow, reorder, in and out, and get it through the distribution center and our inventory availability and storage has gone up.

Where we even want to get faster is in our ability around the fashion. As you know, fashion is where you take your biggest risk. I think that the ability for us now to have tested all the fall colors already and have a great indicator of what colors are working and then being able to read and react to those and get those in within 8 weeks. I think there's even more opportunity to continue to compress the lead time. So we're at the beginning of the beginning of the journey. We are learning a lot. We're going to continue to challenge ourselves to even get faster.

Congratulations on good progress. I have a question for Sharen and for Diane. Sharen, with the success of the Nakeds collection and the Pink bras, how do you see the opportunity for this younger layer, to add the younger layer to your core product mix?

And for Diane, with all the focus on the three categories, other businesses have been, like Aromatherapy and Bigelow, have been lacking in innovation and newness. Do you have any plans to tweak these categories as well?

Sharen Turney

We've been very pleased with our Pink assortment and the reaction that we have been getting. We also believe that the total Victoria's Secret positioning has gotten younger. We have now just recently launched Pout which we do believe is actually a different kind of fit. It really comes off of Victoria, and we changed that to the name Pout that really fits in between Pink and the kind of the core bras of where we are. I think between Pink, between Pout, and then just the general assortment is becoming younger in Victoria's Secret, we are well positioned for every young customer.

Diane Neil

As far as Bath & Body Works, tweak is probably the right word. We continue to add newness to things like Aromatherapy and Bigelow. In fact we're restaging the entire lip category in Bigelow in the summer, which is the majority of the big low business for us. We are adding newness to these categories, but certainly not the same kind of focus as the big three.

Amie Preston

Thanks, Barbara. Next question.

Operator

Your next question comes from Michelle Clark – Morgan Stanley.

Michelle Clark – Morgan Stanley

Good morning. Question on your second quarter comp guidance of 2 to 4, implying a notable slowdown versus up 10 in the first quarter despite easier compares. Just wondering if there's anything you were seeing out there or was it just the degree of conservatism? Then, Sharen, if you could just give us the hit to the second quarter comp from the shorter VS semiannual sale. Thank you.

Amie Preston

We're going to go to Stuart for that.

Stuart Burgdoerfer

So with respect to our comp guidance for the second quarter, just to reiterate three or four points that are most on our mind. The first is that we are lapping significant promotion from last year. As mentioned already and through the call, we intend to be much less promotional in Q2. Then the last thing I would say is we continue to manage this business very conservatively and with discipline. So those are really the key messages around how we see comps for Q2 – much less promotional, managing with conservatism and discipline.

Sharen Turney

Actually the Victoria's Secret semiannual sale is not shorter. It is on line. Victoria's Secret Direct is being shortened by five days. Honestly, I honestly believe that because we've pulled back on all the promotion that we will have created some pent-up demand. I believe that we will be flat to last year, even shortening the sale.

Good morning. Congratulations. Lately, top line stability improvement certainly has been the trend. How is the AUR trending and how do you see it moving forward given the speed in fashion that's involved in both businesses? And just lastly, you've had good successful launches at Victoria's Secret, whether it's Miraculous, whether it's the Nakeds, what's being done differently to get these types of results than perhaps in the past? Thank you.

Sharen Turney

I can take the first one. Our AUR is basically flat as we continue to balance the mix of the business, balance the good, better, best pricing. So we have great growth between the balance between units and AUR. We're very pleased with that.

When I think about what we're doing differently from a launch perspective is that we have been able to unlock how to get more incrementality from the total business as we go into launch. The fact that we are bringing in bras, the Miraculous is two cup sizes. What we're seeing is that bringing in that product also lifts very sexy. Why would it lift very sexy push-up? Because if someone doesn't want that kind of lift, they still have a great option in push-up. The same thing with Naked. It's a lightly lined bra. So we're adding diversity within the assortment that helps us to continue to get more incrementality through the total business.

Diane Neil

And anywhere at Bath & Body Works is down slightly to last year. But that is mainly due to mix as we have more of our business done in our top three categories. AURs are lower than as we look at our performance brands, or even the third party branded business that we exited last year. But our EDS is up slightly as a result.

Amie Preston

Thanks, Diane. Next question.

Operator

Your next question comes from Erika Maschmeyer – Robert W. Baird.

Erika Maschmeyer – Robert W. Baird

Good morning and congratulations. You have done a great job of paying down debt. What's your goal or end game here? Can you remind us of your philosophy? Then, also, could you update on inventory turns by brand and what any [inaudible] for Bath & Body Works versus Victoria's Secret? I know you've recognized substantial benefits, particularly at Bath and Body in terms of lowering inventory and increasing in-stocks.

Amie Preston

We will go to Stuart for both of those.

Stuart Burgdoerfer

With respect to debt and our philosophy on capital structure, the first thing I would say is we're very comfortable with our level of balance sheet debt and our total debt. As we commented on, we have reduced it about $400 million over the last 6 months or so. We're not seeking, per se, an investment grade rating. What's important to us is that we have appropriate cash and liquidity, which we do, that we have flexibility, which we do. This business generates a lot of cash flow. We're comfortable with our balance sheet debt. The maturity profile we've improved a lot over the last 18 months or so. So it's a very good maturity profile. We're very comfortable with our capital structure situation.

With respect to inventory turns, we are not going to go into the details of that by business, but what I can tell you is that we have been improving turn in all of our major businesses over the last 12 to 18 months. It's a key focus for us, but we're not going to go into the details of that by brand.

Amie Preston

Thanks. Next question.

Operator

Your next question comes from Howard Tubin – RBC Capital Markets.

Howard Tubin – RBC Capital Markets

Thanks. Just maybe one question for you, Martyn, can you update us on your plans and thoughts for the Victoria's Secret business outside of North America?

Martyn Redgrave

Sure. As I mentioned in my remarks, we are planning to open our first Victoria's Secret full flagship stores in Canada in the late summer time frame, four stores in Canada. That really is the test and validation for us of our ability to deliver the Victoria's Secret full flagship, full store brand to a foreign country. That's the next major step in our development of Victoria's Secret outside the United States. Beyond that, we have not announced any specific plans.

I think as we did with BBW, we used Canada as our test bed for BBW and started that process a couple of years ago now. As we move forward, we'll be looking for opportunities on a worldwide basis for Victoria's Secret, but taking a very cautious and careful approach.

The other thing we are continuing to work on is the TNT concept, what we call TNT, which is travel and tourism which is under the Victoria's Secret brand name but, as we described on previous calls, is a hybrid accessories, beauty, and limited intimate apparel assortment distributed through airport retail locations, as well as a couple of department store shop in shop kind of locations. We're continuing to see very positive results from that pilot and learning experience and looking to continue to expand that in the balance of the year.

Amie Preston

Thanks. Next question.

Operator

Your next question comes from Neely Tamminga – Piper Jaffray.

Neely Tamminga – Piper Jaffray

Great. Good morning. Thanks for the add here. Diane, I just wanted a question for you. You've had project insight, I think, longer than the VS division and just wondering how some of the tool box to read and react. Sharen often talks about it and I think is a good step in the right direction. What you guys have been able to already effect and do and what the potential path can be for VS down the road, too, using those tools?

Diane Neil

I am not quite sure the insight tool is what really gets you in the read and react and the speed model. It's more about the headset of the organization and us testing and learning from that agenda, and it's really about the actions and discipline and execution that we have versus really using a system tool.

Amie Preston

Thanks, Diane. Next question.

Operator

Your next question comes from Marni Shapiro – The Retail Tracker.

Marni Shapiro – The Retail Tracker

Congratulations. Sharen, I saw Pout and I thought it looked great. I was curious more about Pink, how it fits in next to Pink, will you really keep it as a separate agenda, different on the floor? And then also in Pink, you’ve done a very good job of taking some of the promotions from Victoria’s Secret, the two [inaudible] bras, the mix and match tees and tanks and bringing them to Pink. But you’ve continued to overlay that with the free flip-flop and things to that effect. So can you just talk about how you plan to strategize going forward? Because it seems like you pulled some parts from Victoria to Pink, but kept the Pink stuff there.

Sharen Turney

Well, we didn’t pull anything from Victoria’s Secret into Pink. I think that what we’re looking at from a Pink perspective in that positioning, and it’s really targeting to that 19-year-old Collegiate girl so then it can also go down in age as well. So when we think about the two for $32 that you have to buy both, two bras, they come together. It’s almost, if you think about it, it’s your first bra. In terms of Pout, it’s a totally different positioning than Pink. It’s really a lifestyle. It’s more European in feeling. And it has a different fit esthetic than what Pink has.

Marni Shapiro – The Retail Tracker

Will you continue to layer on the two-fer promotions and keep the original Pink ones, like the flip-flops?

Sharen Turney

I think that if you’re talking about the GWP is really a total Pink. It’s really a surprise and delight. Then when you think about wanting a piece of the Pink brand, we give away, come in and make a purchase, and get a free dog. We have pulsed those things in and out as really a surprise and delight. And we will continue to do that.

Amie Preston

Operator, I think we have time for maybe two more questions.

Operator

Your next question comes from Jeff Black – Barclays Capital.

Jeff Black – Barclays Capital

Thanks. A question for Stuart and just how you are running the business here. I know you said you were very promotional last year, but does the guidance really say anything about what you’re seeing with traffic now, first. Second. Do you think you have the ability to chase into trends if you see some better sales trends as we saw in 1Q with comps well north of what you guided to? And third, as we look at the back half, is there anything or I guess what would change your thinking on how you inventory the business and what might move you to a more aggressive posture this year, if at all? Thanks.

Stuart Burgdoerfer

There's a lot wrapped up in that question. But the four or five points that I would make that aren't just from my perspective, it's the perspective of the team that's running the business. There is some uncertainty in the environment, but you shouldn't interpret our guidance as some new view of that. As we commented on, we remain comfortable with our May comp guidance of flat to low single digit would be a point to reiterate.

Another point to reiterate is, again, affecting those numbers is doing a lot less promotion this year than we did a year ago. And maybe two more points, we continue to manage this business in a conservative way. It's really paid dividends for us over the last 18 to 24 months.

We talked earlier in this call about flow-through. You get that great flow-through when you manage the business conservatively; and looping back to a part of your question, we are able to chase goods. Both Sharen and Diane have commented previously and again today about their focus along with the sourcing part of the organization and working with our sourcing partners about continuing to work hard, to reduce lead times, and have more agility, have more open to buy, and that absolutely allows us to read and react and chase in shorter periods of time. And we certainly have done that through the fall of last year and again this quarter.

So I think those are our key headsets, if you will, or points of view as it relates to the sales line and things around that for the balance of the year.

Amie Preston

Thanks. Last question, operator.

Operator

Your last question comes from Roxanne Meyer – UBS.

Roxanne Meyer – UBS

Thanks. Let me add my congratulations. My question is relating to Victoria's Secret Direct. How do you see the opportunity to grow the business, I guess in part keeping in mind how far apparel has come versus last year? What categories are currently under-penetrated online? And when do you think you will begin to grow Victoria's Secret Direct internationally, knowing that it does take time to build up that infrastructure but perhaps that might be the best opportunity? Thanks.

Sharen Turney

I think there are a couple of categories that we are under-penetrated in. The two are, which are our priorities right now online, are Pink as well as Beauty. Those are the two big categories that we're under-penetrated on that tie back to the brand that we have big opportunity. As I told you earlier, we are starting a Pink catalog as we go into the fall season.

Today in the Direct business, we do about $200 million internationally without really doing anything different. We do believe that there is an international opportunity. But as the team really is looking at all of our international strategies, the Direct piece will be part of that so be looking forward to more news on that subject later.

Amie Preston

Great. Thanks, Sharen. We thank all of you for joining us this morning. We thank you for your continuing interest in Limited Brands, thanks.

Operator

This concludes today's conference call, you may now disconnect.

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